The ragged Keynesian excuse that all will be well in Japan once the jump in the consumption tax from 5% to 8% is fully digested is false. Here’s the problem: this is just the beginning of an endless march upwards of Japan’s tax burden to close the yawning fiscal gap left after the current round of tax increases, and to finance its growing retirement colony. There is no possibility that Abenomics will result in “escape velocity” Japan style and that Japan can grow its way out of it enormous fiscal trap. Instead, nominal and real growth will remain pinned to the flatline owing to peak debt, soaring retirements, a shrinking tax base and a tax burden which will rise as far as the eye can see. Call that a Keynesian dystopia. It is a cautionary tale for our times. And Japan, unfortunately, is just patient zero.
The first half of this week has been very interesting from an economic, financial and geopolitical viewpoint. Despite what appears to be globally increasing risks, the financial markets have seemed relatively unfazed. Historically, such calm has always existed prior to the eventual storm. This week’s “3 Things” takes a look at some of the “rising risks” that we believe are being ignored which could potentially be harmful to individual's portfolios.
Against expectations of a further rise in inventory build of 0.7%, wholesale inventories rose only 0.3% in June (the same pace as in May) missing by the most since February 2013. With GDP now basically an exercise in inventory expansion and contraction (Q2 inventory estimate amounte to 40% of GDP), this 'miss' offers little hope for the initial Q2 rebound to hold its exuberance. In addition, wholesale sales also missed (up only 0.2% against expectations of a 0.7% rise) with growth slowing for the 3rd month in a row.
There is a growing certainty in the global economic outlook that is deeply alarming. The welfare-driven nations continue to impoverish their people by debauching their currencies. As Japan’s desperate monetary expansion now shows, far from improving her economic outlook, she is moving into a deepening slump, for which this article provides the explanation. Unfortunately we are all on the path to the same destructive process.
China PMI Jumps To 2 Year Highs (Jobs Contract For 27 Months), Japan PMI Slips (Jobs Worst In 11 Months)Submitted by Tyler Durden on 07/31/2014 20:51 -0500
China's official manufacturing PMI beat expectations by the most since Nov 2013 and jumped to its highest since April 2012 - sure it did after all the forget-the-reforms liquidity, QE-lite, and local government spending dragged forward. Perhaps worryingly the steel industry saw domestic and export new orders crater (from 55.7 to 48.2 in July). The employment sub-index fell once again (now in contraction since May 2012) as large enterprises dominated the upbeat report (medium and small clinging to 50.1 PMIs). Japan's PMI dropped for the first time in 3 months from 50.8 to 50.5 with output contracting and payrolls only marginally positive (slowest since August 2013). And then to end the night, Markit/HSBC's China Manufacturing PMI drops from its Flash 52.0 to 51.7 - perfectly in line with the government's data.
As we showed in December of 2013, where the scramble to accumulate inventory in hopes that it will be sold, profitably, sooner or later to buyers either domestic or foreign, is most visible, is in the data from the past 4 quarters, or the trailing year starting in Q2 2013 and ending with the just released revised Q2 2014 number. The result is that of the $675 billion rise in nominal GDP in the past year, a whopping 52%, or over half, is due to nothing else but inventory hoarding.
One of the biggest games played by the bean counters in Washington in the US is the overstatement of GDP growth by understating inflation.
Having shown 11 awkward-to-explain charts of the Chinese economy, exposed the liquidity crisis that still lingers just under the surface, and exposed the "discrepancies that abound" in China's data, it was only right and proper in this new topsy-turvy normal that HSBC China Manufacturing PMI - after 8 months of missed expectations (but a very recent surge to the highest levels in 2014) - should smash expectations and surge to 52.0, its highest sicne Jan 2012 (and 2nd highest since the recovery began). Despite this exuberant data, employment fell for the 9th straight month.
Professor Krugman is at it again - conjuring fairy tales about a benign long-term fiscal outlook. Notwithstanding that the public debt has surged from 40% to 75% of GDP during the six short years since 2008, he claims there is no reason to fret and that there is no debt spiral anywhere in the future. In part that’s because the Keynesian priesthood has declared that interest rates have down-shifted on a permanent basis. Under a regime of even modest monetary normalization over the next quarter century, current fiscal policy will lead to interest rates that are far higher, not lower, than the growth rate of nominal income. So its time to put Greece right back into the front and center of the US fiscal picture.
In an odd admission of the possible fallibility of a centrally-planned economy, none other than Chinese Premier Li recently noted, "we should never assume that we few at the top have more insight or power but should try to mobilize the intelligence and creativity of the many thousands of our people so as to create unrivaled value." Perhaps the Federal Reserve would do well to listen. However, Li did not excuse himself from the need to spin how well things were going. On the heels of our 11 awkward Chinese fact charts, Li explains "the Chinese market is booming, the economy strong [sic]. Enterprises are the mainstay of the market." However, as Diapason Commodities' Sean Corrigan, when trying to confirm this 'fact', "discrepancies abound."
Paul Krugman reads the latest long-term forecast from the US Congressional Budget Office (CBO) and he likes what he sees. Even though the chart below is the CBO’s projections for the growth of federal debt, described by CBO as "a path that would ultimately be unsustainable," Krugman nonetheless offers a rosy commentary...
With U.S. rates higher than those of major foreign markets, investors are provided with an additional reason to look favorably on increased investments in the long end of the U.S. treasury market. Additionally, with nominal growth slowing in response to low saving and higher debt we expect that over the next several years U.S. thirty-year bond yields could decline into the range of 1.7% to 2.3%, which is where the thirty-year yields in the Japanese and German economies, respectively, currently stand.
There has been much discussion as of late about the end of the current quantitative easing program and the beginning of the Federal Reserve "normalizing" interest rates. The primary assumption is that as interest rates normalize, the financial markets will continue to rise as economic growth strengthens. While this certainly seems like a logical assumption, is it really the case?
"Excess credit creation is at the heart of much of China’s GDP growth, and why this means that China must choose between a sharp slowdown in GDP growth as credit is constrained, or a continued unsustainable increase in debt. The key point is that we cannot simply put the bad debt behind us once the economy is “reformed” and project growth as if nothing happened. Earlier losses are still unrecognized and hidden in the country’s various balance sheets."
Now that even that bedrock of the Keynesian voodoo religion, the Gross Domestic Product calculation, has become a ridiculous farce, with everyone in Europe suddenly adding the uncalculable "contribution" from drug dealers and hookers all in a mad dash to make debt/GDP ratios appear better than they are, it is truly time to unleash the clowns as none other than the country which has taken fabricating economic data to an artform, no not the US for those confused but China, is preparing to change the way its calculates its GDP, with the biggest contribution coming from, hold on to your hats, R&D. One wonders if "reverse engineering" of pirated products and services is covered in this "non-GAAP GDP" category. The end result? GDP for the country which cumulatively will be several percentage points higher once the entire fudging/recasting exercise is completed. Here are the details.